E.U. carbon fraud: Could it happen here?

Europe’s Emission Trading Scheme (ETS) cap-and-trade system has taken a somewhat undeserved drubbing in the press. Overall, it has functioned reliably and reasonably efficiently. Most of the alleged “Carbon Fraud!” you hear about in some quarters was really just easily fixable design flaws (like an initial over-allocation of allowances); tax payment scams that were wholly unrelated to the integrity of the carbon-reduction program (like the recent value-added tax scam); or a lousy offset program that is a potentially serious flaw, but that is also fixable as well as a threat to any carbon reduction plan.

But the latest revelation — what appears to be wholesale theft of carbon credits from some European registries — is another animal. It is, indeed, worrisome, and it points to some of the more structural flaws in Europe’s trading system. The biggest problems are that the ETS system is overly sprawling, maintaining dozens of national registries of carbon credits that lack sufficiently clear central oversight. And the markets themselves permit an array of trading activities that seem to allow rouge traders to dupe other market participants.

The good news is that virtually all of these problems are fixable (though news accounts suggest that European regulators are not moving toward reform terribly fast). Plus, while the alleged theft is certainly a black eye for the ETS, it’s hardly a refutation to the program, which really has accomplished most of its objectives.

The better news is that absolutely none of these problems need to occur in North American carbon markets. In fact, just last month a new analysis of American carbon markets conducted by the U.S. Commodity Futures Trading Commission, together with a number of other federal agencies (USDA, Treasury, SEC, EPA, FERC, FTC, and EIA), documented how a well-regulated trading program could be executed domestically. (If you’re a carbon market geek, the full 50 page report is well worth reading; it’s the single best coverage of the topic I’ve seen.) Given clear regulatory oversight, a carbon trading market needs to be no riskier or more controversial than any other kind of regulated commodity trading, whether soybeans or wheat or whathaveyou.